What makes up the price of a litre of petrol?

Rishi Sunak cut fuel duty by 5p today’s Spring Statement. But duty is only one component of the petrol price. Saloni Sardana explains just what makes up the price of a litre of petrol.

The chancellor, Rishi Sunak, cut in fuel duty by 5p in his Spring Statement – the first cut to fuel duty in more than a decade – in an effort to contain the cost of living crisis. 

Before the cut, fuel duty was levied at a flat rate of 57.95p per litre for both petrol and diesel, while VAT of 20% was charged on the product price and the duty.

The fuel duty will come into effect at 6pm today and will remain in place for one year. Sunak says the measures will generate £5bn. 

The RAC says that the 5p cut in fuel duty and subsequent reduction in VAT charged would save just over £3 off the cost of filling a 55-litre tank.

Why was fuel duty cut?

The cut, which was largely anticipated, comes as fuel prices have hit record highs. Ahead of the Spring Statement, the national average price of petrol rose to 167.3p a litre, while diesel hit 179.9p. 

Fuel prices crashed in 2020 as Covid-19 meant demand for energy plunged. But demand for oil has returned with a vengeance after restrictions were lifted. As a result, the price of crude oil has shot up, driving up petrol and diesel prices. 

Then Russia invaded Ukraine, which caused prices to spike further after the US banned Russian oil imports. The UK has also said it will phase out Russian oil by the end of this year. 

To understand the significance of a 5p cut in fuel duty, you may be wondering “how are petrol bills made up anyway?” 

A breakdown of petrol costs

The pump price of petrol is made up of six components: fuel duty, cost of petrol, VAT, retailer profit and delivery & distribution. 

• Fuel duty

Fuel duty, which is now set at 52.95p a litre, represents roughly 35% of a litre of petrol. 

• Wholesale costs

The cost of wholesale petrol to the supplier is the second biggest component – accounting for roughly 33% –  and is based on the price of raw materials including crude oil and refining costs. Petrol prices move in line with oil prices which can be very volatile. For example oil prices rose above $100 a barrel last month after Russia invaded Ukraine and prices have risen by around 80% in the last year. 

• VAT 

VAT represents about 20% of the price of a litre of petrol. As the price of fuel goes up, the amount of VAT you pay goes up, too.

While reports suggested Sunak was considering a cut to VAT, he left it unchanged. 

• Retailer Profit 

The amount retailers receive from the sale of every litre is rather low, at around 8%, says the RAC. 

• Delivery and distribution 

The cost of distributing and transporting the fuel is done by the wholesaler and represents 1% of the total cost. 

• Biofuel content

The RAC also mentions E10 fuels- which is a biofuel made up of 90% regular unleaded and 10% ethanol. The RAC says this makes up for 7% of the cost of one litre of petrol. 

Does the 5p cut in fuel duty go far enough?

While the cut in fuel duty is welcome news as a whole, there are concerns that the move is quite small given UK inflation now stands at 6.2% and both petrol and diesel prices rose by 13p and by 21p a litre in the last month alone. 

As Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, points out: “the fuel duty cut is better than a poke in the eye with a sharp stick, but it’s hardly going to be life-changing for hard-pressed motorists”.

Laura Suter, head of personal finance at AJ Bell, echoes this view. “With petrol at 167p per litre, 86p of that goes to the Government, in fuel duty and VAT – more than half the cost. So there was definitely scope to go further and it’s scant help for those who don’t use their car regularly or don’t own a car”. 

But she adds that cutting fuel duty does have a double advantage for consumers as it “cuts the costs for businesses too, who in turn can pass on the cost savings – or at least not increase their prices by so much”. 

But with the energy price cap due to increase by more than 50% in the next week, saving up £3.30 every time a consumer fills up is unlikely to yield significant savings.

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